Before getting into the importance of “Available Credit” and how it can affect your FICO® Score, it’s essential to know the difference between three specific terms:
- Current balance is the amount you currently owe on your credit card.
- Credit limit is the amount of available credit you have on your credit card. You can spend up to this limit.
- Available credit is your credit limit less the current balance (and any pending transactions)
Now we’ll return to the significance that available credit has on your credit score.
The two most important factors taken into account when determining your credit score is your payment history and your credit utilization. This is where it could get a bit confusing, so let’s break it down…
Credit Utilization is the ratio of your current credit card balance to your credit card limit. It basically gauges the amount of your credit limit being used. For example: If your credit limit is $10,000 and your current balance is $2,000, your credit utilization is 20%.
As you can imagine, a lower credit utilization ratio is usually better for your credit score since this factor makes up 30% of your FICO® Score.
Set Your Boundaries
Since the FICO scoring model takes into consideration the credit utilization for each credit card balance and the credit utilization of all credit card balances, a higher utilization percentage can hurt your score.
You can think of it this way: a credit score is used to gauge the probability that you’ll repay borrowed money. In the eyes of credit scoring models, higher balances might indicate you’ve overextended yourself and that there’s an increased risk of falling behind on your payments. That’s why it’s important to keep your credit utilization low. Even if you haven’t strained your resources, the scoring model uses the numbers it has and will flag you as a risk – thus lowering your score.
Tips to Manage Your Available Credit and Credit Utilization
- Check the credit limit on your credit cards. If they’re low (or lower than you’d like them to be), call the credit card company and apply to have them increased. Then, if you put more credit on those cards your credit utilization ratio won’t rise a quickly as it does now. Note: Requesting a credit limit increase may result in a hard inquiry into your credit report, which can affect your score because you are seeking new credit.
- Distribute purchases amongst different cards. If you have a lower balance on several cards rather than a higher balance on one card, your available credit will enable you to keep down your credit utilization.
- Discover timing of credit card issuer reporting. Different creditors provide information to the credit bureaus at different times. If you check your billing statement, you can see when your billing cycle ends. If your balance is low at the end of this cycle, your credit card company will most likely report this low balance to the credit bureaus, thus lowering your credit utilization.
At myFICO forums, members discuss how they deal with available credit, credit utilization and much more. See for yourself and stop by anytime.